Letters to Housing Market Policymakers

Published in Mortgage Introducer

28 July to 1 August 2014

brian.hall@themodelworks.com

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1. Benefits of Homebuying
Most would agree we have a housing problem, but few really understand the nature of this problem
and fewer still what corrective action should be taken. As a result there is little fact-based, public
discussion on the problem or its long-term consequences.
There is a debate about the pros and cons of homebuying and whether the trend towards a larger
private rental sector is a positive one. I would like to begin this letter by explaining why renting is
such a bad idea for the individual, the taxpayer and the economy.
1.1

The Customer Perspective

The majority of young people want to buy their own homes and it is in their financial interests to do
so. Even more would want to buy if they were aware of the benefits.
They are loaded with student loans, paying rents that are high by international standards, while
saving a deposit on an overvalued and rapidly inflating property, with future tax increases to service
the previous generation's legacy of transgenerational debt.
Fixing the housing problem would be an effective way of eliminating avoidable costs for young
people. Economically, socially and politically this would be a positive goal.
1.2

Buying Young

The graph below details the lifetime savings from buying a home, with a mortgage, compared with
renting. The buyer is aged 25 (the average in the 1960s).
Buying at 25
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
-50,000

2014
2017
2020
2023
2026
2029
2032
2035
2038
2041
2044
2047
2050
2053
2056
2059
2062
2065
2068
2071
2074

-100,000
Discounted Cashflow

Discounted Equity

Combined

Based on a Nationwide Building Society's average first time buyer property price with conservative
projected variables (for example property prices tracking background inflation), the model calculates
a homeowner is 374,242 better off at today's value, in terms of savings and equity, compared with a
lifetime tenant in the private rental sector.

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1. Benefits of Homebuying
The key points in the analysis are:

Initially the homeowner cashflow is negative because of the need to pay a deposit, lender
and legal fees, stamp duty, etc. The model treats this as an opportunity cost and applies
interest, so long as it remains negative.

However, this negative cashflow is mostly compensated for by the acquisition of equity in
the property and this accumulates over 25 years until the mortgage is paid off and the
homeowner owns the property outright.

Repaying a mortgage may be slightly more expensive than renting initially, but the
repayments discount over time, as they relate to the original purchase price, while rents rise
with (in this analysis, background) inflation.

After 25 years the homeowner can live rent free for several decades. Their costs reduce to
insurances and maintenance only. This repays any negative cashflow that remains and then
provides a substantial surplus.

The resulting benefits are broadly similar with a series of purchases and sales over time, rather than
just the simplified, single purchase, modelled in this example.
Through their lifetime the homeowner will have more cash to spend and save. They will be able to
accumulate greater wealth and should have a much larger pension.
Homeowners will be less dependent on the state (in terms of housing benefit, social services support
and long term care costs). Therefore, the individual returns from homeownership aggregate into a
reduced burden on the taxpayer and improvements to the economy.
1.3

Buying Older

The graph below details the savings, at today's value, of becoming a homeowner, via a mortgage, at
age 37, compared with renting. (the average age of an unassisted first time buyer before the Help to
Buy scheme was introduced).

400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
-50,000
-100,000

2014
2017
2020
2023
2026
2029
2032
2035
2038
2041
2044
2047
2050
2053
2056
2059
2062
2065
2068
2071
2074

Buying at 37

Discounted Cashflow

brian.hall@themodelworks.com

Discounted Equity

Combined

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1. Benefits of Homebuying
Buying a property later in life reduces the returns at today's value because:

The homeowner has spent an additional 12 years paying rent.

The period of maximum saving, during which the homeowner is living rent free, having paid
off their mortgage, is 12 years shorter.

Buying later means that compound interest on their savings is reduced.

A homeowner buying at 37 is 228,939 better off. So buying at 37, rather than 25, will results in a
loss of 145,303 at todays value.
1.4

Conclusions

There are clear benefits, to the individual, the taxpayer and the economy from homebuying rather
than renting and these benefits are maximised by buying young. Given the facts, policymakers should
be promoting initiatives to encourage early homeownership.
With millions adversely affected, the cost of not fixing our housing problem is likely to exceed 1
trillion. But this is the tip of an iceberg, when one considers the likely increased demand in state
benefits. To resolve the problem we must recognise its root causes.
Policymakers and stakeholders need to understand the problem better and there must be more factbased, public discussion on the problem and its long-term consequences.

brian.hall@themodelworks.com

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2. Insights and Understanding

With millions adversely affected, the cost of not fixing our housing problem is likely to exceed 1
trillion. But this is the tip of an iceberg, when one considers the likely increased demand in state
benefits. To resolve the problem we must recognise its root causes.
Policymakers and stakeholders need to understand the problem better and there must be more factbased, public discussion on the problem's long-term consequences.
2.1

Treating the Symptoms

Unfortunately, stakeholders concentrate on issues that affect them rather than the health of the
market. Builders focus on acquisition of land and planning constraints, while lenders focus on
acquisition of funding and compliance issues. Builders and lenders have switched to servicing buy-tolet and builders are selling off-plan, overseas. All this makes things worse by consuming properties
and finance, increasing demand and pushing up prices.
Resolving short-term stakeholder issues will not address the housing problem. Neither will costly
initiatives like Help to Buy, which treats the symptomatic delays and exclusion from homeownership,
rather than the root causes. It involves government in the market and exposes the taxpayer to risks.
For these reasons it is not a viable long term solution.
2.2

Defining the Dysfunction

The housing market is dysfunctional because it is failing in its primary purpose, which is to help
customers buy their own homes. Stakeholders have forgotten that the market exists to serve
homebuyers, not them. The stakeholders have a monopoly on data and opinion and they are rarely
challenged. To resolve the housing problem this must change.
The solution will undoubtedly include returning property to sensible levels of affordability.
When Kate Barker published her Review of Housing Supply, 10 years ago, the first time buyer gross
house price to earnings ratio was 4.4. This was considered too high back then. The average had been
2.7 over the previous ten years. Today the ratio is 4.9 and rising.
However, if fixing the property problem requires a property price correction, we can expect
resistance from stakeholders currently being rewarded by the dysfunctional market
2.3

Resistance to Change

Many homeowners have benefited from rising property prices and would not want their capital gains
reversed. Some bought at the peak of the market or have remortgaged and now rely on low rates. A
property price correction would push many into negative equity. This creates a conflict of interest for
the government, particularly as it is encouraging first time buyers to buy into an over-price market
using the Help to Buy scheme.
The buy-to-let sector is expanding fast, as landlords profit from the exclusion of millions from
homeownership caused by the dysfunctional market. Their profitability is dependent on property
price inflation. Many highly geared landlords are expanding their portfolios with interest-only loans
and so becoming vulnerable to a property price correction.
Builders and lenders will also resist change. They function, well enough, in the dysfunctional market
and will argue against actions that disadvantages them in the short-term, even if the outcome is a
healthy market that resolves its primary purpose in the long-term.

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2. Insights and Understanding

Previous governments have benefited from the perception that homeowners, who make up the
majority, have been getting richer as property prices have risen. A government that addresses the
affordability issue now will face a negative response. They will also have to grapple with the impact
of a property price correction on the banking sector.
However, resolving the housing problem is vital and tough decisions have to be made.
Implementing a programme of change over time will enable the costs to be discounted over a longer
period. Implementing a programme of change in the short period before the next election in May
2015 is impracticable. However, much could be done in advance of the election to prepare for a
programme of change immediately following the election.
Then, acting quickly will be vital as pension savers will have freedom over how they use their pension
funds from April 2015. Many will choose to invest in property and this could cause a asset price
bubble in an already over-priced market. As affordability is a major contributor to the housing
problem this must be discouraged immediately following the election.
2.4

Conclusions

Property in the UK is worth 4.4 trillion and yet we have no regularly reported indicators of the
market's health. To understand the market better we need better information.
The market is awash with data, but much of it is incomplete, inaccurate and biased and it
communicates the world view of stakeholders. To make sense of the market we need complete,
accurate and unbiased data from a single, independent, data aggregator.
Policymakers require continually updated, customer-oriented indicators that define exactly what is
going on and highlight the costs, benefits and risks of taking combinations of corrective action to fix
the housing problem, via a collaborative programme of change.

brian.hall@themodelworks.com

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3. The Case for Change

Policymakers require continually updated, customer-oriented indicators that define exactly what is
going on and highlight the costs, benefits and risks of taking combinations of corrective action to fix
the housing problem, via a collaborative programme of change.
3.1

Focus on Quality

Companies often use quality techniques to improve their competitiveness in a market. I believe these
methods can be applied to the market itself.
By applying this methodology we get a different perspective. The subjective opinions and priorities of
builders, lenders and private sector landlords become irrelevant. Instead we begin to focus on the
customer, what they want and how they can best be served.
Quality techniques are quantitative. In addition to establishing customer requirements and using
these to benchmark priorities, they will allow us to define how well the UK is doing compared with
other countries with whom we have to compete in terms of retaining our brightest young people.
This will also provide valuable insights into our options.
These methods are designed to manage large strategic programmes of change over time, involving
disparate policymakers and stakeholders, who may have different and conflicting priorities and
agendas. It follows they are ideal for resolving our housing problem.
There are always costs of not acting to resolve customer requirements. Quality experts use tools to
quantify this Costs of Quality to establish the case for change.
3.2

Defining the Customer

With respect to defining the housing market's customer, we need to distinguish between homebuyers
and homeowners. Homebuyers are customers while homeowners are not.
Homeowners have completed the transaction. They have put a roof over their heads.
Homeowners may want their property to rise in value, but even with prices rising in line with
background inflation, they will be hundreds of thousands of pounds better off than a private sector
tenant. Rising prices favour homeowners but disadvantage homebuyers. Given the benefits to the
taxpayer and the economy, policymakers should favour homebuyers.
3.3

Defining the Costs

As discussed, delays and exclusion from homeownership are symptomatic of the housing problem
and a 1 trillion cost is the tip of the iceberg, when one considers the resulting increased demand in
state benefits. A Cost of Quality analysis allows us to examine why.
Let's consider the resulting consequences of tenants having less money to spend and save.
Underlying demand for housing benefits in the private rental sector is already rising fast. This
demand will soon reach tens of billions of pounds per annum. The government is capping these
benefits, but this will have a no effect on the number of tenants and the higher rents they have to
pay. So capping will displace the Cost of Quality elsewhere.
Of greater concern must be an aging population of millions of private sector tenants. Each will be
hundreds of thousands of pounds worse off in terms of savings and pensions. There are now over ten
million private sector tenants and this number could double over the next five years. A significant
percentage of these will never own their own homes.

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3. The Case for Change

On retirement they will find it difficult to pay their way. Their state pension will not cover private
sector rents, so demand for housing benefit will undoubtedly increase. With fewer savings they may
qualify for free social services care and if they later need residential care the state will have to pay for
this too, as they will have no equity in their home.
The retired population is expected to double by 2050 and someone retiring then is 31 today and likely
to be experiencing delays and exclusion from homeownership. The total cost to the economy and the
taxpayer will probably be several trillion pounds overall.
3.4

Why the Market is Not Self-Correcting

Given that the long term consequences of current trends are damaging to homebuyers, the taxpayer
and the economy, we must consider why the market is not self-correcting.
The parties that benefit most from the dysfunctional market, including builders, lenders and private
sector landlords, are not adversely affected by the dysfunctional market, while those that are
adversely affected, the homebuyer and the taxpayer, have no direct influence.
This is the root cause of the housing problem and the reason why the system is not a self-correcting
free market. It never will be, unless this anomaly is eliminated. This is where the solution to our
housing problem lies and where we must focus our attention.
It follows that the market will not become self-correcting without policymaker intervention.
3.5

Conclusions

Stakeholders must experience the discomfort of the dysfunctional market. This can be arranged by
those controlling the levers of change, including the government and the Bank of England. They will
then have a real incentive for fixing the housing problem.
To initiate a quality-based programme of change will require the full commitment of at least one
government department involved in housing or the Bank of England. This commitment will begin
with defining strategic objectives aimed at resolving the housing problem.

brian.hall@themodelworks.com

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4. Improvement by Design
To initiate a quality-based programme of change will require the full commitment of at least one
government department involved in housing or the Bank of England. This commitment will begin
with defining strategic objectives aimed at resolving the housing problem.
4.1

The Government's Position

in its 2011 housing strategy Laying the Foundations: A Housing Strategy for England, the Prime
Minister and Deputy Prime Minister pledged that that they:
'...would be a different kind of government: one that took decisions that were right for the
long term, not right for the headline; that always acted in Britains national interest; that left
this country stronger and fairer for our children'.
The Secretary of State for Communities and Local Government went on to say:
'...we will not achieve this by attemptingto control the market from Whitehall. The system
of setting top-down targets for housing, vast amounts of planning guidance and excessive
regulation did not deliver the homes we need nor the places that people want to live in. This
Government is doing things differently'.
It follows that the government is relying on free market principles. While I applaud the sentiments,
this strategy does not explain how all this will be achieved.
4.2

Free Market Principles

With a true free market. homes would be getting larger, better and cheaper in relative terms, in
response to the demands of the consumer. This is not happening. New properties are about half the
size they were in the 1930s and they have become so expensive that millions are now being delayed
or excluded from homeownership.
The housing market is virtually the only sector where this is happening. Imagine if we, in the UK,
were driving cars that were worse than they were in the 1930s.
Relying on free market forces will not work so long as builders, lenders and private sector landlords
can exploit the existing dysfunctional market. Things could even get worse.
I am not suggesting that the government and Bank of England should become involved in the day to
day operations of the market, but rather they collaborate with stakeholders to fix the housing
problem and then exit once a self-correcting free market exists.
4.3

Setting Objectives

Setting objectives requires some thought, but fours sets of goals immediately come to mind:

Improving first time buyer affordability

Removing the taxpayer from the system

Creation of a customer-led, free market

System resistance to asset price bubbles

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4. Improvement by Design
Current initiatives take us in the opposite direction. The Help to Buy scheme is assisting first time
buyers buy into an over-priced market, rather than improving affordability. Indeed the influx of first
time buyers may be contributing to property price inflation. The scheme is also drawing the taxpayer
into the day to day operation of the market, rather than fixing it.
I am not saying that we shouldn't have a Help to Buy scheme, because we must assist young people in
the short term. However, it should be envisaged as an expedient tactical workaround, which is being
employed only until strategic solutions take effect.
The Bank of England's involvement in setting lending criteria may ensure lenders lend more
conservatively, but if this encourages homebuying delays and exclusion in homeownership the
economy will suffer. In a similar fashion to capping housing benefits, fixing one problem often creates
a larger one elsewhere, because the market is a complex system.
Objectives will spotlight where collaboration is vital between government departments, the Bank of
England, homebuilding planners, lender regulators and stakeholders.
For example, the Department of Communities and Local Government defines housing policy, but the
Department for Work and Pensions picks up the tab for failings in this policy in terms on increased
demand for housing benefits. Therefore, the setting of objectives should include consultations with
policymakers and stakeholders.
This approach establishes collaboration as the foundation for the programme of change.
4.4

Conclusions

Setting objectives will facilitate the establishment of a quality-based programme of change. However,
we must consider the fact that the housing market is a complex system and will react in a potentially
unpredictable manner to corrective actions.
Quality techniques will give us a customer-orientated, collaborative approach, but we also require
tools to anticipate the market's dynamic behaviour.

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5. Fixing Everything, Everywhere

Setting objectives will facilitate the establishment of a quality-based programme of change. However,
we must consider the fact that the housing market is a complex system and will react in a potentially
unpredictable manner to corrective actions.
Quality techniques will give us a customer-orientated, collaborative approach, but we also require
tools to anticipate the market's dynamic behaviour.
5.1

Market Dynamics

The housing market actually consists of three or four linked markets. Each is a complex system and
combined they are super-complex. They are 1. homebuilding, 2. homebuying and 3. the private
rental sector. Ideally we should also include 4. the social rental sector to cover all the ways property
is constructed and people put roofs over their heads.
Everything is connected. Initiatives can cause unintended consequences rippling through the system.
These ripples can then trigger other ripples which can cause feedback and even produce a negative
result. This behaviour can be understood and quantified using scientific management techniques like
systems thinking and systems dynamics.
These systems techniques can be insightful but their practical use is often limited. However, I believe
they can be combined with other methods, like quality techniques, to create a powerful resultsoriented methodology for managing a programme of change.
Picking up on my previous suggestions:

Complete, accurate and unbiased data will improve stakeholder and policymaker
understanding of the market.

Quality techniques will allow them to:

Define the housing problem from the customer perspective

Define priorities and objectives for optimising the market

Provide a methodology to:

Encourage stakeholder collaboration

Manage a programme of change.

Systems techniques will provide tools to allow them to project the paybacks and outcomes
to combinations of initiatives in relation to their objectives.

This combination of techniques could be deployed as a pilot that would then by extended.
5.2

Where do we Begin?

Given the housing market is a complex system and the housing problem is deeply embedded within it,
the challenge is where do we begin as we set about fixing it?
Systems techniques will allow us to begin everywhere, because we will understand the cause and
effect relationships between the combinations of initiatives and results.

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5. Fixing Everything, Everywhere

Policymakers could define, in advance, what each stakeholder must contribute if an initiative is going
to work and what the outcome will be. This will ensure all the stakeholders are consulted and have
the opportunity to contribute. Quality techniques will provide the destination and systems
techniques will facilitate the navigation.
Where a projected and actual outcome differ, we can work out why this happened and this will
provide valuable insights that can be applied in the future. In this way the programme of change will
become more effective over time, as confidence in the approach increases, participation improves
and positive outcomes accumulate.
This approach will aim to eliminate 'unintended consequences'. Robert King Merton, who coined this
phrase, considered that unintended consequences occur because of:

Ignorance and errors - making important decisions based on incomplete, inaccurate or

biased data

Allowing immediate interests to override long-term interests failing to project the final
outcomes

Basic values a commitment to obsolete principles and resistance to change regardless of

evidence

Failing to consider the inherent complexity of the system where small changes have big
effects

With complete, accurate and unbiased data, realistic objectives and a collaborative programme of
change approach, based on quality and systems techniques, I believe these obstacles to progress can
be overcome and the housing problem can be fixed.
5.3

Conclusions

To keep this letter to a manageable length I have skipped over a number of issues that affect or are
affected by the housing market and the current trends.
For example a rapidly expanding, highly geared, interest-only, mortgage funded, private rental sector,
driven by a profit motive, is not a stable foundation for resolving the housing needs of tens of millions
of individuals. Profitability is far too volatile for one thing and we need to consider how a fractured
nation, with tens of millions of disenfranchised individuals paying rents to a property owning elite,
will contribute to long-term social cohesion.
Our current trends are doing little for the nation but to keep builders, lender and private sector
landlords in business. Policy makers have failed to understand the bigger picture and get to grips with
what needs to be done to fix our housing problem. Following the next election all this must change
and the time to begin the planning process is right now.
5.4

The Way Forward

My work has exposed failings in the existing system and provided quantitative evidence as to the
corrective action required. I would like to see these insights put to good use.
I have developed a methodology based on quality and systems thinking techniques called Dynamics.
It combines these proven methods with analysis and programme management techniques to create a
robust, customer-oriented, programme of change approach.
I would welcome an opportunity to discuss how we can collaborate on such a programme.

brian.hall@themodelworks.com

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